This invention relates generally to a method and system for facilitating the identification, investigation, assessment and management of legal, regulatory financial, market, credit, operations and reputational risks (“Risks”). In particular, the present invention relates to a computerized system and method for banks and non-bank financial institutions to access information compiled on a worldwide basis and relate such information to a Hedge Fund, wherein the information is conducive to quantifying and managing Risks associated with the hedge fund.
Although the term “hedge fund” may not be strictly defined by government statute, over time, the term generally refers to a variety of pooled investment vehicles that are not registered under the federal securities laws as public corporations, investment companies, or broker-dealers.
As money-laundering and related concerns have become increasingly important public policy concerns, regulators have attempted to address these issues by imposing increasing formal and informal obligations upon financial institutions, including hedge funds. Government regulations authorize a broad regime of record-keeping and regulatory reporting obligations on covered financial institutions as a tool for the federal government to use to fight drug trafficking, money laundering, and other crimes. The regulations may require financial institutions to file currency and monetary instrument reports and to maintain certain records for possible use in tax, criminal and regulatory proceedings. Such a body of regulation is designed chiefly to assist law enforcement authorities in detecting when criminals are using banks and other financial institutions as intermediaries for, or to hide the transfer of funds derived from, criminal activity.
Obligations include those imposed by the Department of the Treasury and the federal banking regulators which adopted suspicious activity report (“SAR”) regulations. These SAR regulations require that financial institutions file SARs whenever an institution detects a known or suspected violation of federal law, or a suspicious transaction related to a money laundering activity or a violation of the Bank Secrecy Act (BSA). The regulations can impose a variety of reporting obligations on financial institutions.
Perhaps most broadly relevant for the present invention, current regulations require an institution to report transactions aggregating to $5,000 that involve potential money laundering or violations if the institution, knows, suspects, or has reason to suspect that the transaction involves funds from illegal activities, is designed to disguise such funds, has no business or legitimate purpose, or is simply not the sort of transaction in which the particular customer would normally be expected to engage, and the institution knows of no reasonable explanation for the transaction after examining the available facts.
Federal regulators have made clear that the practical effect of these requirements is that financial institutions are subject to significant obligations to “know” their customer and to engage in adequate monitoring of transactions.
The Securities and Exchange Commission (SEC) typically will receive limited information regarding the activities of various large market participants, including some hedge funds, through reports that are filed when they acquire 5% or more of a class of security issued by a publicly traded company. The SEC will also receive limited information about hedge funds through reports filed by managers exercising investment discretion over accounts having $100 million or more in equity securities. This information, however, does not reveal much detail about the trading activities of Hedge Funds and other large participants in our markets. In addition, the limited partnership structure of a hedge fund can make it more difficult to ascertain who the ultimate “customer” of a financial institution is.
Risk associated with a transaction involving a hedge fund can be increased due to the difficulty in gathering and accessing pertinent data on a basis timely to managing risk associated with the transaction. As part of due diligence associated with performing financial, it is imperative for a financial institution to “Know Their Customer” including whether a customer is contained on a list of restricted entities published by the Office of Foreign Access Control (OFAC), the Treasury Office or other government or industry organization. The amount of information that needs to be considered to evaluate whether an entity poses a significant risk or should otherwise be restricted, is substantial.
What is needed is a method and system to draw upon information gathered globally that relates to hedge funds and the partners associated with a fund. The information can be utilized to assist with risk management and due diligence related to a financial transaction involving a hedge fund. A new method and system should anticipate scrubbing data from multiple sources in order to facilitate merging data from all necessary sources. In addition, data mining should be made available to ascertain patterns or anomalies in the query results. Risk information should also be situated to be conveyed to a compliance department and be able to demonstrate to regulators that a financial institution has met standards relating to risk containment.